Measuring systemic risk: A risk management approach

Lehar, Alfred

doi:10.1016/j.jbankfin.2004.09.007

Cited by 459 publications

(306 citation statements)

References 46 publications

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“…This correlation has been found to be significantly positive in banking systems across different countries (Lehar, 2005). Moreover, in market stress scenarios fire sales may actually exacerbate such correlations (Cont and Wagalath, 2011).…”

Section: Contagion Index Of a Financial Institutionmentioning

confidence: 87%

Network Structure and Systemic Risk in Banking Systems

Cont

Moussa

Santos³

2013

Handbook on Systemic Risk

224

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We present a quantitative methodology for analyzing the potential for contagion and systemic risk in a network of interlinked financial institutions, using a metric for the systemic importance of institutions: the Contagion Index.We apply this methodology to a data set of mutual exposures and capital levels of financial institutions in Brazil in 2007 and 2008, and analyze the role of balance sheet size and network structure in each institution's contribution to systemic risk. Our results emphasize the contribution of heterogeneity in network structure and concentration of counterparty exposures to a given institution in explaining its systemic importance. These observations plead for capital requirements which depend on exposures, rather than aggregate balance sheet size, and which target systemically important institutions.

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Section: Contagion Index Of a Financial Institutionmentioning

confidence: 87%

Network Structure and Systemic Risk in Banking Systems

Cont

Moussa

Santos³

2013

Handbook on Systemic Risk

224

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“…Similarly as Lehar (2005), we define the systemic risk as an event in which at least a certain fraction of banks (in this banking system) crash simultaneously. Given the definition, we first measure the systemic risk conditional on the crashes of a single bank or a group of banks by calculating the following probability of simultaneous collapses of at least r banks conditional on the collapses of a subset banks,…”

Section: Systemic Importance Measuresmentioning

confidence: 99%

“…In this paper, similarly as in Lehar (2005), systemic risk is defined as an event in which at least a certain fraction of financial institutions, for example, at least r financial institutions, crash simultaneously. We measure the systemic importance of a financial institution or a group of finan-cial institutions by its contribution to the systemic risk.…”

Section: Introductionmentioning

confidence: 99%

Measuring systemic importance of financial institutions: An extreme value theory approach

Gravelle

2013

Journal of Banking & Finance

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In this paper, we define a financial institution's contribution to financial systemic risk as the increase in financial systemic risk conditional on the crash of the financial institution. The higher the contribution is, the more systemically important is the institution for the system. Based on relevant but different measurements of systemic risk, we propose a set of market-based measures on the systemic importance of financial institutions, each designed to capture certain aspects of systemic risk. Multivariate extreme value theory approach is used to estimate these measures. Using six big Canadian banks as the proxy for Canadian banking sector, we apply these measures to identify systemically important banks in Canadian banking sector and major risk contributors from international financial institutions to Canadian banking sector. The empirical evidence reveals that (i) the top three banks, RBC Financial Group, TD Bank Financial Group, and Scotiabank are more systemically important than other banks, although with different order from different measures, while we also find that the size of a financial institution should not be considered as a proxy of systemic importance; (ii) compared to the European and Asian banks, the crashes of U.S. banks, on average, are the most damaging to the Canadian banking sector, while the risk contribution to the Canadian banking sector from Asian banks is quite lower than that from banks in U.S. and euro area; (iii) the risk contribution to the Canadian banking sector exhibits " home bias ", that is, cross-country risk contribution tends to be smaller than domestic risk contribution. JEL classification: C14, C58, G21, G32 Bank classification: Financial stability; Financial system regulation and policies; Financial institutions; Econometric and statistical methods RésuméLes auteurs définissent la contribution d'une institution financière au risque systémique financier comme la hausse que connaîtrait ce risque si l'institution s'effondrait. Plus l'établissement en question contribue au risque systémique, plus il revêt de l'importance du point de vue du système. En se basant sur différentes mesures pertinentes de ce risque, les auteurs proposent un assortiment d'indicateurs de marché de l'importance systémique des institutions financières, dont chacun rend compte d'aspects distincts du risque systémique et qui sont construits à partir de techniques multivariées inspirées de la théorie des valeurs extrêmes. Armés de ces indicateurs, ils repèrent les institutions d'importance systémique dans le secteur bancaire canadien (ramené aux six principales banques du pays) ainsi que les institutions financières étrangères qui contribuent de façon significative au niveau de risque à l'échelle du secteur. Trois grandes conclusions ressortent de leurs estimations. D'abord, les trois plus grosses banques -RBC Groupe financier, le Groupe Financier Banque TD et la Banque Scotia -ont un poids systémique plus élevé, mais leur classement par ordre d'importance varie selon l'indicateur utilisé;...

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“…Empirical studies confirm that correlation in the financial sector increased. De Nicolo and Kwast (2002) illustrate an increase in correlation between large and complex financial organizations during the 1990s, whereas Lehar (2005) finds that this development was more severe for North American than for European banks.…”

Section: Iii2 Common Shocksmentioning

confidence: 99%

Keynesian and Austrian Perspectives on Crisis, Shock Adjustment, Exchange Rate Regime and (Long-Term) Growth

Maurel

Schnabl

2011

Open Econ Rev

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International audienceThe 2010/11 European debt crisis has revived the discussion concerning the optimal adjustment strategy in the face of asymmetric shocks. This paper approaches the question from a theoretical perspective by confronting exchange rate based adjustment with crisis adjustment via price and wage cuts. Econometric estimations yield a negative impact of exchange rate flexibility/volatility on growth, which is found to be particularly strong for countries with asymmetric business cycles and during recessions. Price flexibility is found to have a positive impact on growth. Based on these findings we support a further enlargement of the European Monetary Union and recommend more exchange rate stability for the rest of the world

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Measuring systemic risk: A risk management approach

Cited by 459 publications

References 46 publications

Network Structure and Systemic Risk in Banking Systems

Network Structure and Systemic Risk in Banking Systems

Measuring systemic importance of financial institutions: An extreme value theory approach

Keynesian and Austrian Perspectives on Crisis, Shock Adjustment, Exchange Rate Regime and (Long-Term) Growth

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